- Overview of the deal between Delta and LATAM
- Stronger foothold for Delta in South America with the new partnership
- Future outlook for Delta post the deal
Delta Air Lines, one of the major players in the US airline industry, recently announced that it is buying a 20% stake in LATAM Airlines Group for $1.9 billion. The investment has created a new alliance for the US based airline to gain more ground in the South American airline market – a region where Delta has long struggled to get a strong foothold, lagging much behind its other two American rival airline: American Airlines and United Airlines. The new alliance has the potential to bring a change in the hands for the top airline carrier for the routes between North and South America. The two airlines will serve about 435 destinations worldwide and service more passengers between North and South America than any other airline partnership in the world. As part of the deal, Delta will also invest $350 million to support the restructuring in the newly established partnerships. In addition, Delta will take LATAM’s commitment in the purchase of 10 additional A350 aircraft which is expected to be delivered starting 2020 through to 2025 and will also acquire four A350 aircrafts from LATAM.
Delta, for the better part of the past decade, had invested in Brazil’s Gol Linhas Aereas for gaining grounds in the South American market. But the partnership did little for Delta and did not give the airline the reach for regions beyond Brazil. Also, considering GOL being a low-cost carrier and Delta being a well-renowned full-service carrier, it was a set-back for Delta passengers wanting the full-service amenities on its connecting flights via GOL. LATAM, on the other hand, is a full-service airline having better regional coverage, with flights by LATAM Argentina, LATAM Chile, LATAM Peru, LATAM Colombia and LATAM Ecuador, totaling more than 1,000 flights per day. Also, Delta is focusing on regions beyond Brazil such as Colombia, Peru and Chile, which accounts for a combined 45% of South American travel to the United States, compared to Brazil which has just 29%. Air traffic in each of these three countries individually is expected to triple up between 2020 and 2040, according to forecast by CAF. In 2018, according to reports by IATA, Colombia, which has a quarter of the population of Brazil, rivaled the latter for U.S. travel, with 2.7 million passengers flying between Colombia and North America, while Brazil only slightly edged with 3 million passengers flying between Brazil and North America.
This new alliance is a major blow for American Airlines which had been pursuing LATAM Airline for some time now. American Airlines had all the necessary regulatory approvals for anti-trust immunity to align schedules, pricing and revenue sharing terms and conditions for the company’s U.S. and South American operations but had the setback when the Chilean Supreme Court ruled against it over competition concerns. Also, for years American Airlines and LATAM Airlines, under the Oneworld program, have controlled a major part of the travels between the North American and South American skies, but with the latter’s new partnership with Delta and Delta’s alliance with SkyTeam (it being one of the founding members); there may be a major shift in the passenger loyalty. This new alliance will be a threat for American Airlines strong hold in the South American market, where it unquestionably has a much larger market share. But this will most likely change once Delta has full access to LATAM’s entire network.
Airline announcements normally do not send ripples across the industry but this deal between Delta and LATAM is big in so many ways – in terms of the money spent; in the view that Delta stole LATAM from American Airlines and Oneworld, and is in the process of cutting off Gol; most importantly the implication it could have on global alliances and the potential to realign air travel not only in the region between United States and South America but also between South America and Europe, between South America and the Mideast and between South America and Australia. The reason for this is Delta’s multiple holdings across major airlines across the globe. Also, this new partnership will add to the already held stakes of Delta in airlines around the world – from its 49% in Virgin Atlantic and Aeromexico that it owns, plus its ownership in Korean Air, Air France-KLM and China Eastern. Delta with its new alliance is likely to grow from being a small market player in South America to becoming one of the major players having a prominent presence in the Latin region as well. Also, as per reports Delta separately continues to eye a 10% stake in Italy’s flagship carrier Alitalia. In an interview with Delta’s Chief Executive, when asked about the proposed investment in Alitalia, he said, “We are in discussion with the consortium and the government and there are no changes in our position. We are ready to invest in Alitalia but 10% is still what we believe to be the right level of investment.” If successful, this would mean a further extension of the airlines’ network coverage across the European region.